When it comes to legislation regarding healthcare reform, it’s difficult to predict precisely what will happen. But regardless of the action taken at the federal level, it is clear that there will continue to be significant change at the state level — especially with respect to Medicaid, the massive program that insures low-income residents in the United States.
Medicaid, the largest government health program, covers 75 million people, almost a quarter of the U.S. population. That’s more people than Medicare covers (57 million), and more people than purchase insurance individually, such as on the Affordable Care Act exchanges (21 million). In the 2016 fiscal year, Medicaid’s budget was US$553 billion, with states picking up 33 percent and the federal government paying 67 percent. Because states remain committed to serving the neediest, they are seeking ways to contain the growth in medical costs and preparing for any reductions in federal support.
The traditional Medicaid model utilizes a fee-for-service arrangement, in which physicians and other providers contract directly with the states. Because this model often leads to unpredictable cost surges and places strains on state budgets, many states are moving to control costs by entering into risk-based contracts with managed care organizations (MCOs), health plans managed by private companies. By paying a fixed amount to an MCO for each member, state agencies can manage their costs in a more predictable manner, while delegating care — and care coordination — for beneficiaries to the MCOs. There are 275 MCOs in 38 states and the District of Columbia. North Carolina has announced its intention to move from a fee-for-service model to managed care in 2019. Although 65 percent of all Medicaid beneficiaries are enrolled in MCOs, only 43 percent of total Medicaid expenditures are made under managed care, which means there is still room for more movement.
PwC’s health industries teams’ research on the New Health Economy aims to quantify the ways in which potential policy scenarios affect profitability and call for strategic responses that are resilient in the face of current trends and uncertainties. Looking ahead, we believe states' Medicaid programs will continue to evolve to rely more on managed care. But as a winner-take-all scenario develops, not all healthcare players will benefit equally. To compete in this emerging world, companies will have to develop new capabilities in several areas.
Moving to Managed Care
We expect that states will undertake three major groups of actions to move more of their Medicaid programs into managed care.
Medicaid’s population includes mothers, children, seniors, working adults, and the disabled, of all ethnicities and from all geographies.
First, states will increase the geographies that are placed into managed care. When states initially rolled out managed care, they focused on regions in the state with higher concentrations of membership and healthcare providers, as well as on specific Medicaid programs and populations, such as beneficiaries of the Temporary Assistance for Needy Families (TANF) program. But states are expanding the geographic footprint of MCOs. In 2017, Illinois and Oklahoma expanded their managed care programs statewide. Others, such as Iowa, Missouri, Utah, and Washington, are increasing geographies within their states.
Second, states have placed additional populations and programs under managed care, such as the aged, blind, and disabled (ABD) and intellectually/developmentally disabled (I/DD) populations. ABDs typically are enrolled in programs that cover nursing facility care, assisted living support, and other daily in-home living services. Currently, less than 25 percent of beneficiaries in these long-term services and supports (LTSS) programs are enrolled in an MCO. But 22 states have placed their LTSS programs under managed care, and several more are considering the move.
Third, states are looking to add services to MCO contract agreements that have typically been omitted, such as behavioral health. Today, 24 states do not include behavioral health in such contracts. But in 2017, Nebraska launched a Medicaid program, Heritage Health, that included behavioral health. When North Carolina debuts managed care for Medicaid in 2019, it will cover behavioral health.
Although these trends present opportunities to increase revenues, they will also create more critical pressure for providers and payors to bend the cost curve downward. As more weight is given to outcome-based care, MCOs will be expected to deliver more effective services. The competition for better rates and more innovative care will lead to a market in which only a few of the 275 MCOs (within 163 health plans) will survive and thrive. A few large national players and deep local/regional players will succeed; others will either exit the market or be acquired.
Those who wish to succeed — whether they are locally operated plans, national plans, or third-party administrators — must develop new capabilities and focus on the following five strategic imperatives.
Know your customer. In most areas, beneficiaries have the ability to choose which MCO they join. And even though most beneficiaries join through passive enrollment, members have the option to switch to another plan if they believe that they are not receiving adequate care. Payors should take the time to understand not just the medical needs of their members, but also their preferred method for care and communication. Is there an opportunity to reframe how care is delivered, one that engages the beneficiary and his or her family more effectively and at a lower cost? Young mothers may be more adept at using text messaging to connect with physicians; the elderly might respond better to FaceTime or other home devices, such as Alexa, to check in with their care team. Payors can also use customer knowledge to connect beneficiaries to other public programs for which they may qualify, such as food and housing assistance. Doing so can help beneficiaries live better, more stable lives, which should lead to better health outcomes.
Manage risks, especially with newer populations. Medicaid’s population includes mothers, children, seniors, working adults, and the disabled, of all ethnicities and from all geographies. The only commonality is their income. Because beneficiary health needs and preferences aren’t uniform, players need to fully understand the expected utilization of services for new populations. Next, they should identify preventable episodes in the different populations and develop plans and predictive models to prevent and treat them, and to monitor the effectiveness of interventions. For example, payors should understand what triggers hospital admissions in rural seniors or the urban disabled and develop programs to reduce the risk of admission. Such programs can include health education, a care team, telehealth monitoring, and connections to specific community programs. Predictive models can increase the return on investment of the program by determining a member’s likelihood of responding to specific interventions such as online health education or weekly monitoring.
Construct networks and incentives that support the care models. The ability to contract with providers effectively will be key to winning and maintaining procurement contracts. Over time, payors should evaluate whether the providers are accessible to members, proactively follow up, and produce better outcomes. Contracts should evolve as payors learn more about their provider networks. Some providers may be ready immediately for value-based contracts, whereas others will need to be supported along the journey. Incentives should be added that directly align with a payor’s intended improved outcomes and action plans — for example, points for measuring a member’s retention of the material. Additionally, payors will need to determine how to overcome any network gaps, such as finding ways for rural patients to access specialists not in their area. One possibility is to add a supplemental remote network to provide additional support.
Deliver new services. State agencies are increasing responsibilities on MCOs, including services for which they have not traditionally been responsible, such as behavioral health, long-term care, and LTSS. Whether it is through contracting, acquisition, or hiring, payors need to develop the capabilities to provide and manage these complex services quickly — and to coordinate them with medical services. And as these programs become more complicated, payors will need to develop the ability to, for example, manage cost sharing and enter value-based contracts with providers. Some states are following the lead of the Healthy Indiana Plan, which encourages beneficiaries to contribute to savings accounts — a service managed by MCOs — in exchange for reduced cost-sharing obligations. As more MCO revenue is withheld or tied to quality scores, the ability to monitor, manage, and intervene will be critical to running a sustainable Medicaid business.
Build a robust culture of compliance. It’s hard to overstate the need to be compliant with state contracts. Infractions can lead to fines, the cancellation of auto-enrollment, or sanctions and contract termination. In this competitive environment, compliance within operations should be considered table stakes.
This may all sound like a long to-do list. But the scale of the task is equal to the scale of the opportunity. Regardless of whether its budgets are increased or decreased in coming years, Medicaid will still cover more U.S. residents than any other program. As the competitive landscape narrows, only those MCOs that understand their diverse membership, develop new capabilities to support their members at scale, and develop a provider network with aligned incentives will win.
- Katherine Kohatsu specializes in government programs strategy and operating models in the healthcare payor sector for PwC’s health industries advisory practice. Based in Chicago, she is a principal with PwC US.
- Angelina Payne specializes in government programs operating models in the healthcare payor sector for PwC’s health industries advisory practice. Based in Salt Lake City, she is a director with PwC US.
- Sundar Subramanian is an advisor to executives in the healthcare industry for Strategy&, PwC’s strategy consulting business. Based in New York, he is a principal with PwC US.